SALEM — Pension board meetings are rarely the place of tears.
But last September, the financial experts who typically listen to numbers and forecasts and actuarial assumptions heard from Cathy Miller, a school board member who traveled from Redmond to deliver some stark news. For the second year in a row, she said, a sharp spike in retirement costs would force her district to cut school days or teachers or both.
“We are clearly at risk,” she told the board, warning of “substandard” classroom time or teaching quality.
Already shouldering a larger share of government pension costs, taxpayers will be contributing even more next July as the Public Employees Retirement System tries to dig out from a $16 billion unfunded liability. The Great Recession can be blamed for the depth of the hole, but the road to a massive pension liability is also strewn with generous promises, questionable decisions and thwarted attempts to fix them.
Public employee benefits have been a political hot potato in several states since the recession began straining government budgets, but Oregon has largely escaped the acrimony. That could change next year as calls for reforms grow louder. Gov. John Kitzhaber signaled his support in a speech to school board members last weekend, laying out a blunt choice between public pensions and classroom resources.
Altogether, the state, school districts and local governments will spend $900 million more over the next two years on pension costs, a hike of 45 percent, to help get the pension fund on a 20-year path toward full funding. Experts estimated at the end of 2011 that Oregon’s pension fund had enough assets to pay 73 percent of the estimated costs for all current and future retirees, a shortfall of $16.3 billion. Those figures are based on an assumption that investments will grow on average by 8 percent per year, which critics say is far too optimistic.
How did we get here?
The immediate cause was the economic collapse in 2008, which wiped out 27 percent — $17 billion — of the pension fund’s value. A year earlier, it was nearly fully funded.
“Fundamentally, it’s really easy to figure out why those rates have gone up, and it’s because of the incredibly bad investment year in 2008,” said Gregory Hartman, a lawyer who represents PERS beneficiaries.
But PERS critics say the problem is far deeper than the investment losses alone and extends to the system’s structure as designed and tweaked over decades by the Legislature and the pension board, which was dominated for a time by members of the system. In some cases, workers have earned more in retirement than they did on the job.
Many of the questionable decisions were outlined in a 2011 report by the City Club of Portland:
• Workers hired before 1996 get a guaranteed annual return on their account of 8 percent, regardless of the actual performance of financial markets. As a result, workers shared in the fruits of economic booms without losing out during busts.
• Some retiring workers can choose an option known as the “money match,” in which the pension fund doubles the money in a retiree’s account and converts it to an annuity.
• Depending on their date of hire, some workers who reject the money match option get credit for unused sick leave and vacation time.
• Public employees are required to contribute 6 percent of their salary to their pensions. In the past, many government agencies have agreed to pick up the 6 percent contribution for their workers in lieu of pay increases.